Tuesday, March 18, 2008


(Yes, another "dammit" post.)

I guess when everybody's expecting a cut in the federal funds rate, it just has to be cut. The expectations were for a cut between half-a-percent and one percent, so the Fed split the difference. Me, I'm with Fed governors Fisher and Plosser (Dallas and Philly, respectively), who favored a smaller cut. The two were characterized by the Times as "hawkish" on inflation.

Hawkish? I'm not hawkish. I'm scared.

The discount rate also was dropped by three-quarters, which is a good thing because the Fed may be the only place left for American banks to acquire capital. Low interest rates are sure to mean low interest by foreign lenders, especially when the dollars that get paid back will be worth so much less than the dollars invested. If I were the Sheik of Araby with a vault full of petrobucks, I guess dollars might be all I had to lend, though -- making the U.S. the only game in town. On the other hand, at the next meeting of OPEC, the notion of valuing a barrel of crude in euros rather than dollars might seem like a pretty good idea.

Monday, March 17, 2008

How bad is it, Ben?

Only that bad? Well, last year, I suppose, the biggest worry was confidence. If you'd told people we were up Shit's Creek and probably would have to paddle out with our tongues, who knows what might have happened to the economy? Hell, people might have thought all those sub-prime mortgage derivitives collapsing were a real problem, and then how could we have -- uh -- paddled our way out?

Okay, I get it. Fine. But just how bad is it?

Oh! A little worse than you told us, huh? Well, those write-downs by Citi sure had the markets nervous, but cutting the federal funds rate and encouraging even those banks having "no problems" to borrow money from the discount window really should have done the trick -- don't you think?

Except it didn't do the trick. Nobody much wanted to be seen bellying up to that discount window, and the federal funds rate doesn't make a damned bit of difference in a liquidity crisis. Okay, it does encourage certain idiot speculators to bid up stock prices, but that's just short-term action. A day or two later, the idiots are losers -- except for those who found even bigger idiots to buy on the bump. (Granted, some bargain hunters who are willing to hang onto their purchases for a few years might do quite nicely down the road. There's some really good value out there if you can separate the grain from the chaff.)

Okay, but I'm waiting for you to tell me -- how bad is it?

Hmm... You know, come to think of it, maybe it wasn't such a good idea to repeal Glass-Steagall after all. It just might have softened -- or even prevented -- the sub-prime mortgage mess. What was Bill Clinton thinking when he signed it? He was a Democrat, wasn't he? (Oops, I forgot! New Democrats are not all that similar to us Old Democrats -- those of us who still think FDR had a few damned good ideas!)

Well, Ben, it's not your fault. You're just out there trying to clean up the mess Greenspan left behind, and I honestly think you're doing pretty well, considering what a hell of a mess it is. I think it's great that you've dusted off the New Deal playbook -- and I don't mind at all that you made it possible for JPMorgan-Chase to pick up Bear-Stearnes at a flea-market price. If there's a "moral hazard" in your action, I don't see it. Those who invested in that nest of vipers were justly screwed, and those who led the company to its demise will plummet along with the value of their stock options.

The opening of a discount window for investment banks leaves me feeling a little queasy, but I guess it had to be done. Sunday's surprise quarter-of-a-percent cut in the discount rate, if we're lucky, might mean no further cut in the federal funds rate tomorrow -- no matter how pitifully Wall Street whines. If the idea is to get banks to use the discount window, keeping the discount rate lower than the federal funds rate seems like the best way to do it. Anyway, the dollar has fallen as low as it ought to go. If the dollar's current devaluation isn't enough to correct our imbalance of trade, the value of the dollar isn't the problem. The people of this country shouldn't have to see the value of their incomes and their savings evaporate so that a few speculators can turn a quick profit.

Maybe I'm deluding myself, but I think that you might be exactly the right person to be Chairman of the Fed in these difficult times. You know your history, you're willing to risk trying some new approaches to our problems, and you've arrived at a point where you can be impervious to political pressure if that's what you want. I think that's what you want -- that, and a strong shot at minimizing the pain of the god-awful mess we're in.

A good ninety-eight percent of America is economically illiterate, and a substantial majority of the remaining two percent is ideologically blinded. I think you must understand that there won't be a hell of a lot of support for doing the right thing, but that doesn't wipe out your obligation to do it.

So do it.

And tell me , how bad is it -- really -- and how bad will it get?

Yeah, I was afraid of that.

Friday, March 14, 2008

The Bear-Stearns Bailout

I'm not inclined to post twice in one day, but the news is coming at us hot and heavy.

The Fed's bailout of Bear-Stearns, through intermediary JPMorgan Chase & Co., is the big financial news of the day. Yesterday, the talking heads at Bear-Stearns were telling us that the company had no liquidity problem. Well, I guess they lied. They were one or two margin calls short of going belly-up, but trying to hold out until the $200 billion Term Securities Lending Facility (TSLF) kicked in on March 27. Whoops!

Personally, I'm happy to have this evidence that Bernanke and the Fed probably understand that the problems in the financial sector have little or nothing to do with interest rates, and everything to do with liquidity. I just wish they might slither out from under the thumbs of Wall Street and the Bush Administration to stop reducing the Federal Funds Rate. Those cuts do nothing but provide momentary stimuli to the stock market, allowing the smarter speculators to cash out, at the expense off the poor suckers still listening to brokers earning per-transaction fees.

Another rate cut at the next meeting of the Fed only will accelerate the precipitous decline of the dollar. If banks are afraid to lend to each other at three percent, they won't be especially less fearful at two-and-a-half or two-and-a quarter. As for the "balance of trade" argument for a weaker dollar, well, it hasn't done shit for Chrysler.

It is well past time to turn away from the economic goal of endless, unlimited growth, and start thinking about economic stability again. The so-called economic "expansion" of the Bush years served only to make certain favored individuals disgustingly rich while the rest of us either held on by our fingernails or fell behind.

For virtually all the Greenspan years, the goal of the Fed was to fight inflation. After all, in those days, inflation meant the big banks would be paid back with money worth less than the money they lent. Today, on the other hand, years of inappropriate but profitable lending. plus reckless backing of leveraged buyouts, have put the banks in an opposite position. Their debts are pushing hard against their assets, and a bit of inflation might do them a world of good.

As for the rest of us, well -- perhaps we should bend all the way over and kiss our collective wallet goodbye.

The Sky is Falling. (Really!)

For thirty years, the Republican Party and the financial services industry have been ideologically committed to deregulation. Free markets, they told us, are self-regulating. Any attempt by government to interfere in their operation can only make them less efficient. The controls imposed by New Deal Democrats have been like anchors, keeping the economy from surging ahead, or like poisons stunting its growth.

Yesterday, the President's Working Group on Financial Markets (PWG) issued a report that is the equivalent of blaspheming in church not by a single minister, but by the whole college of cardinals. It admits that our current financial crisis is largely the result of "regulatory policies, including capital and disclosure requirements, that failed to mitigate risk management weaknesses."

The PWG, which included representatives of the Treasury, the Fed, the SEC, and the Commodity Futures Trading Commission, would not have called for in increase in regulation in response to anything less than a catastrophe. Despite all the attempts to sound upbeat by the Administration and by Wall Street, the report of the PWG is a clear indication of just how bad things are -- bad enough so that even free-market ideologues are willing to take action to keep the same problems from cropping up again.

The recommendations include licensing and regulating mortgage brokers, disclosing conflicts of interest by the bond rating agencies, and requiring far more transparency when banks prepare securitized debt obligations. Granted, such steps are like closing the barn door after a herd of horses has escaped and trampled the corn, the alfalfa, and the vegetable garden. They will do nothing to alleviate our current crisis, but should make it harder for such a crisis to repeat itself down the line.

In the meanwhile, the dollar is sinking like a block of lead, oil is trading at $110 a barrel, and increases in the prices of corn, wheat, and other commodities show no signs of letting up. We are told that the weaker dollar will give our exports a competitive advantage and improve our balance of trade. That might be true if we had anything significant left to export apart from food crops and military hardware, but despite a tanking dollar, our balance of trade still is negative. Our remaining manufacturers are selling more overseas, but their profits are eaten up by the mounting costs of energy and raw materials.

It's harder and harder to find a Pollyanna in the financial pages these days, or even a Pangloss. Times are tough, and they'll get a lot tougher before they get any better. On the bright side, though, it may be harder for future free-marketeers to drive us to deregulated ruin.

Thursday, March 13, 2008

The Spitzer Scandal: some questions

Anybody paying attention when Eliot Spitzer was Attorney General for New York, or during his truncated time as Governor, might have remarked: "Jeez, his testosterone levels must be off the charts." Studies have shown that competitiveness and high testosterone levels correlate measurably -- and those who rise to the top in politics usually are fiercely competitive. Is anybody really surprised when powerful politicians are embroiled in sex scandals?

Still, some observers of the latest sleazy revelations have started to ask, why Spitzer? Was it really a chance discovery arising from a computer program designed to detect money laundering, or was there more to it? Given the history of the Bush Justice Department, one wonders. For a really neat conspiracy theory, look here.

Something I've always wondered about is why, any time a politician gets caught up in a sex scandal, he feels he has to drag his wife along while he says his mea culpa. And why the hell do the wives go along with it? Most of the women I know would be doing personal appearances with their divorce lawyers, not standing grimly in front of the TV cameras as Americans judge whether or not their husbands might have been justified in going elsewhere for sex -- especially since the guys down at the sports bar invariably conclude the answer is "yes."

But those are not my questions. We are told that Spitzer was "Client 9," and paid only $4000 for a four hour session -- meaning that "Kirsten," his special someone, had only a three-diamond rating, the bargain basement of Emperor's Club VIP companions. The men who hired the five-, six-, or seven diamond ladies certainly have to be extremely rich -- rich enough so that we must have heard of some of them -- but the only other possible client I could find named, after an extensive internet search, was the Duke of Westminster -- possibly "Client 6." So here are my questions:
  • Who is Client 1?
  • Who is Client 2?
  • Who is Client 3?
  • Who is Client 4?
  • Who is Client 5?
  • Is His Grace really Client 6?
  • Who is Client 7?
  • Who is Client 8?
  • Who are Clients 10 and greater?
If Spitzer has to take the heat, what about the rest of the johns? Hedge fund managers? Saudi princes? Print their lip-biting pictures on page one! How about corporate executives, or oil magnates, or (hard as this may be to believe) Republicans? Surely they're not all gay! Fair is fair!

And America wants to know!

Monday, March 3, 2008

Action on health care

I'm running up the old red flag today to mark the first installment of a series I call Sensible Things Congress Won't Do.

Back when I taught economics, I liked to present my students with this conundrum: when there are necessary services that the private sector won't provide because they're not profitable, government steps in to provide them. If they should happen to become profitable, government hands them over to the private sector. That's called privatization.

So it follows that anything government does must lose money -- with the costs coming out of our taxes. Well, think about this: wouldn't it make sense for government to get involved in a few things that make money, to offset its losses? That way our taxes wouldn't have to be so high.

My students always thought that sounded like a pretty good idea. "Then," I would ask, "why don't we do it?"

As usual, I would have to answer my own question: "Because that would be socialism!"

Now, what about health care? A clear majority of Americans support the idea of a government run, single-payer health insurance system -- erroneously called socialized medicine by its opponents. It's not socialized medicine, of course, it's just socialized insurance -- and we already have that. It's called Medicare.

Ideologues on the right would love to eliminate Medicare, but there's a good reason Lyndon Johnson was allowed to sign it into law. The elderly and the disabled have a nasty habit of needing medical treatment a lot more often than other Americans. Private insurers are not in business to pay out benefits; they're in business to collect premiums. They don't want to insure the elderly and the disabled -- except for those able to pay vast sums for the privilege.

So, in keeping with our national custom of privatizing profits and socializing losses, the government stepped in -- and something amazing happened. Medicare developed into an extremely efficient and effective enterprise. Its biggest problem is a client pool of people who need far more medical care than the general population.

To me, the answer is simple. Despite the red flag flying at the top of this post, I sincerely believe in competition. I just think it has to be real competition, not some oligopolistic division of the spoils. In keeping with that belief, I believe Medicare should have a chance to compete in the marketplace with private insurers.

The first step is to allow large private employers to buy into Medicare to provide their workers with health insurance. Not burdened with advertising costs, mammoth executive salaries, or stockholders demanding dividend checks, Medicare should be able to offer employers significant savings over private insurers while still collecting more in premiums than it pays out in benefits. On average, the pool of participants would become younger and healthier, so average per-person benefits paid would be reduced.

Gradually, smaller employers also could be included, as well as various kinds of affinity groups -- including groups for uninsured individuals and families that could be organized by state governments or by non-profit social welfare agencies. Each time the pool of Medicare clients expanded to include more of the young and healthy, profit margins would improve -- and the payroll taxes that currently support Medicare could be reduced. Also, each time Medicare expanded, its bargaining power with the health care industry would be strengthened, further reducing costs.

Private insurers, of course, would be encouraged to compete by offering better benefits or (far less likely) lower premiums. Private supplementary plans, similar to those purchased by many current Medicare recipients, undoubtedly would be quite popular. Insurers who were unable to compete successfully would go out of business. After all, that's capitalism.

None of this is in conflict with the Obama or Clinton proposals for health care reform. If employers and individuals are to be required to purchase health insurance, there's no reason that insurance shouldn't be Medicare. If we're going to subsidize uninsured individuals and families, there's no reason those subsidies shouldn't go right back into government coffers instead of into corporate accounts.

The key to all this is that it presents us with more choice -- Americans would be able to choose either a government program or one of many private insurance plans. If the critics of big government are right, and government never does anything as well as the private sector, then the private sector will triumph. The super-salaried CEOs will prove their worth, and Medicare will shrink back to where it began -- or wither away entirely. On the other hand, Medicare just might prove itself a more robust competitor than the private insurers, and evolve into the single-payer system most of have wanted all along.

Sunday, March 2, 2008


I don't believe I ever agreed with anything Bill Buckley had to say, but I was always amused and entertained by the way he said it. I started watching Firing Line when I was in my early twenties, almost always for the sake of hearing one of his many fascinating guests. Over the years, I became a fan of Buckley himself.

He was frankly partisan, aggressively intellectual, and just a little bit pompous -- qualities I recognized in myself, and wholeheartedly enjoyed. I loved the way obscure, multisyllabic words just rolled off his tongue, and the way his face lit up a little bit when he said something especially clever.

A Buckley interview was always a conversation, rather than a grim exchange of talking points. Even when an exchange became clearly competitive, his guests always were encouraged to fully express their ideas; and Buckley's follow-up questions showed that they always had his complete attention. If he pushed a pin into an inflated ego, it always was with grace and good humor.

When Buckley hosted talented liberal thinkers like John Kenneth Galbraith or Noam Chomsky, a single show could become a mini-course in contemporary thinking -- not to mention a mini-course in good manners. Firing Line would have been an extremely bad fit for Fox News.

Civility and intelligence on interview shows are not entirely extinct -- Charlie Rose comes to mind -- but the environments that support them are threatened by the pollutants of noise, commercialism, and pandering to the basest instincts of the media audience. Bill Buckley will be missed.

Saturday, March 1, 2008

The secret of losing elections

I've been reading "The Political Brain," Drew Westen's playbook for Democrats who actually want to win elections. Westen is a clinical, personality, and political psychologist who teaches at Emory University. His main thesis, in a nutshell, is that you don't win elections by appealing to reason. "The political brain," he writes, "is an emotional brain." Democrats, according to Westen, have "an irrational emotional commitment to rationality -- one that renders them, ironically, impervious to both scientific evidence on how the political mind and brain work and to an accurate diagnosis of why their campaigns repeatedly fail."

It's not too likely that Hillary Clinton read "The Political Brain." Maybe she skimmed it one night in a New Hampshire hotel room, but it couldn't have been much more than that. If Hillary's chief strategist Mark Penn checked it out at all, it's certain he tossed it aside without bothering to conceal his contempt.

Mark Penn is a p0llster, and hence has convinced himself that candidates can win elections by telling the public whatever it is his polls tell him the public already believes about policy. Penn worked for Bill Clinton before he worked for Hillary, and somehow managed to take credit for Bill Clinton's political success. Al Gore fired Penn early in the 2000 election season, but sadly didn't hire Westen in his place. Westen could have told Gore that his policy positions made no difference whatsoever, and helped him build his emotional appeal.

But didn't Mark Penn help Bill Clinton? Answer: no. Bill Clinton is a natural politician, with an extraordinary talent for connecting to people on an emotional level -- and that was the secret of his success. Penn actually helped Clinton to be less popular. If you were paying attention at the time, you may remember how the press repeatedly accused Bill Clinton of "government by poll results." It was a valid critique. As a matter of fact, Bill Clinton might have accomplished a lot more had he followed his instincts rather than Penn's poll-based advice.

It seems possible that the conservative press is right when it tells us the Clintons really are liberals -- even though you couldn't tell it from Bill's policy decisions as president or Hillary's voting record in the Senate. Since her chance for the nomination depends on Tuesday's Ohio and Texas primaries, it's probably too late in this election cycle for Hillary to abandon her Penn-induced caution and let it all hang out. Just the same, I think she should give it a try.

It could be good for her soul.